Refinancing your student loans is a great way to lower your student loan interest rate and earn financial freedom more quickly. You can refinance both private and federal loans, and if you’re tracking a multitude of payment dates and timelines, consolidating your loans through refinancing can be a great way to simplify your financial life and work toward becoming debt-free. Plus, you can refinance your loans as often as you’d like, so it never hurts to explore new lenders even if you’ve already refinanced once.
One of your choices as you consider refinancing your student loans is the repayment period. If you’re refinancing in order to lower your monthly payment, you may be tempted to choose a longer period of repayment. On the other hand, if you’re looking to pay off your student loans more quickly, a shorter term may appeal to you.
Let’s get into the advantages and disadvantages of each repayment option.
First Thing First: Are You Ready to Refinance Your Student Loans?
Here are a few signs that it might be the right time for you to consider student loan refinancing:
- Your finances are stable. If you expect a major life or career change in the near future, it might not be the optimal time to pursue refinancing.
- You think you could earn a better interest rate. If your credit score has improved or interest rates have declined, you may be able to lock in a better rate and better bottom line.
- You have mostly private student loans. If your loans are through private lenders, you won’t risk losing any federal benefits by refinancing.
- You need more financial flexibility. If your student loan payments are keeping you from accomplishing other financial goals, refinancing could help you manage your debt and maximize your income.
Changing Your Student Loan Terms
When you consolidate or refinance your student loans, you apply for a loan from a lender like ELFI for the amount of your total existing student loan debt. The new loan will likely have terms different from your old ones, including the interest rate, repayment period, and monthly payment. This is especially useful if you’ve taken out several loans with different amounts and timelines.
So, how do you decide which terms align with your budget and goals?
Choosing a Longer Term: Pros and Cons
Opting for a longer student loan repayment term might result in a lower monthly payment. However, a longer-term loan is “riskier,” according to lenders, and may come with a higher interest rate. Bottom line, you will pay less monthly but more in interest over the life of your refinanced loan.
You may find a longer term beneficial if:
- You’re having difficulties keeping up with your current student loan payments
- You’re working towards other financial goals, such as saving up for a down payment on a car or house, simultaneously
- Your income is reduced and you need to lower your monthly expenses
Choosing a Shorter Term: Pros and Cons
If your goal is to pay off your student loans faster, then a longer repayment term is not the best option. For example, if you currently have a ten-year student loan, refinancing to a five-year or seven-year term may be a better fit. Lenders often reserve their lowest interest rates for credit-worthy borrowers who choose the shortest loan terms. If you want the best possible rate, opting for a shorter loan term will allow you to save money.
You may find a shorter term beneficial if:
- You want to lock in the lowest possible interest rate
- You can take on a relatively larger monthly payment for the ultimate payoff of eliminating your student loan debt faster
- You anticipate needing more cash flow in a few years’ time
Refinancing Your Student Loans With ELFI
When you’re ready to explore your student loan refinancing options, you want a lender who will provide answers rather than leave you with more questions. In addition to potentially lowering your interest rate and choosing a new student loan repayment term, when you refinance with ELFI, you’ll also work one-on-one with an ELFI Student Loan Advisor whose personalized service helps make the process simple and the choices clear.
Learn More: Student Loan Refinancing Frequently Asked Questions
